What is PFRDA?

PFRDA is not a statutory body yet. (Because bill related to PFRDA is yet to be passed).

Timeline:

2003

PFRDA established

2004

(compulsory) New Pension System (NPS), for the new recruits in Government of India (except the armed forces).

2009

New Pension System (NPS) is opened up for any citizens in India who wanted to subscribe, even if they are not in Government service.

Just like we’ve NPS in India, In USA, they’ve a pension scheme for all citizens called “401 (K)”.

Two accounts

In New Pension scheme, there are two types of account

Tier-I

Tier II

Compulsory for every subscriber

Optional.You can open Tier II, only if you’ve opened a Tier I account first.

You cannot Premature withdraw money before retirement age.

Can

NPS: Eligibility

Who can join?

Who cannot join?

Any citizen of India (age 18-60)

Below 18 and above 60

NRI can also join, if he has account in Indian bank.

A person declared insolvent.

Person of unsound mind.

What is PRAN?

When you subscribe to New pension scheme, you’re given a unique account number. Known as “Permanent Retirement Account Number (PRAN)”

Recall that UID/Aadhar also gives you a unique number. But there are differences:

Aadhar vs PRAN: Difference

UID/Aadhar

PRAN

Any resident of India

Only Indian citizen

Any age

Only 18-60

Free

You’ve to make regular payments.

This number doesn’t give any benefits by itself.

It is upto an individual ministry / Department to use this number while giving some scholarship, subsidy, cash benefit etc.

PRAN number gives you pension.

Mentally-unsound and insolvent can get.

Can’t.

Voluntary

Compulsory for new recruits in Government service (minus armed forces).

Aadhar vs PRAN: Similarity

For a private citizen, both are voluntary.

NRI can apply for both.

Players in the NPS game

Subscriber

Person who joins for New pension scheme..

PFRDA

Pension Fund Regulatory & Development Authority. Main boss for NPA.

CRA

Central record keeping agency.

National Securities Depository Limited (NSDL) works as the CRA for NPA. It maintains record of every subscriber, based on his PRAN number.

(recall this NSDL also works as a “Depository” and holds your securities (bonds,shares etc) in electronic (dematerialized) form.

Fund manager

ICICI, UTI, SBI, Kotak etc are the fund managers for NPS.You can decide which fund manager you want to pick up.When you contribute money to NPS, it goes to these fund managers. They invest your money in following*

Equities

Debts (Corporate bonds+Government securities)

*You can decide how much you want to invest in each of them. (with some caveats).

It varies according to how much of your money is invested in Debt or Equity.

You can only tell the fund manager how much % to invest in debt / equity but it is upto the fund manager whether he invests in company X or Company Y. Each fund manager has different preference for companies.

Thus different NPS account holders will end up earning different % on their investment. On the other hand, the EPFO (Employees’ provident Fund) offers uniform 8.5% interest rate to all account holders.

NPS-lite

So far you know that NPS was originally meant for Government employees. Later it was extend to all residents citizens of India. Let’s call that “NPS main”.

Government of India + PFRDA, also initiated another scheme called “NPS-lite”.

“NPS-lite” is meant for weaker and economically disadvantaged sections of society.

How is it different from the “main” NPS?

(main) NPS

NPS-lite

Target audience= (mostly) middle class and upwards.

Poor and lower middle class.

You’ve to give minimum Rs.500 per contribution.

Only Rs.100

You need to visit your agent/bank/fund manager/website and pay the money.

An aggregator (e.g. NGO or Microfinance agent) will come to you and collect money.

you get to decide the proportion of money you want to invest debt vs equities (with some conditions).

by default 85% of your money is invested in debt and 15% in equities.

Swavalamban Scheme

Started in

In 2010.

This scheme will run till 2016-17.

Target audience

People working in unorganized sector.

Condition?

They must contribute minimum Rs.1000 to maximum Rs.12000 per year into their NPS or NPS-lite account.

What is the benefit?

Government will contribute 1000 rupees in their NPS account each year.

They can exit early. (@age of 50 years or after being in the scheme for 20 years). while a “normal” NPS subscriber cannot exit before age of 60.

Why NPS is not popular?

So those players (ICICI, SBI) rather prefer to market their own pension, insurance, retirement plans rather than promoting NPS among their (regular) bank customers.

Same goes for financial advisor, insurance agents etc. They get more Commission by promoting pension/insurance/retirement plans of private companies to their clients compared to NPS.

Other reasons

In NPS, there are multiple actors: PFRDA, CRA and fund managers. NPS doesn’t offer uniform rate of return. Common people find this setup difficult and unsecure, unlike tried and trusted LIC or PPF.

Income Tax benefits under NPS are not significantly higher than the existing investment options.

NPS is not spending lot of money on ads with film stars / cricketers.

Why Swavalamban/NPS-lite is not popular?

Chindu

@PFRDA chairman, I want you to subscribe more and more poor people in the Swabhiman pension scheme because elections are incoming.

PFRDA chairman

Forgive me Sir but you’re confusing Swabhiman with Swavalamban.

Swabhiman = provide banking facilities in remote rural areas

Swavalamban= provide subsidy on NPS accounts for unorganized sector.

Chindu

Ya ya Swabhiman, Swavalamban… whatever man….I’m not giving UPSC exam so I don’t need to worry about such things. Our job is to harass those aspirants with these catchy terms- not ourselves, Got it? Coming back to the main topic: I want you to get more and more poor people in whatever pension scheme we are running, because general elections are coming.

PFRDA chairman

I already tried everything I could, but it’s just not working!

Chindu

Then hold meetings Jholachhap NGOs and bogus microfinance companies and tell them to use their network of grassroot workers to form more self help groups (SHG) and get more and more subscribers.

PFRDA chairman

It is Easier said than done because

I don’t have sufficient staff to organize meetings / coordinate with those people.

I don’t have any coercive powers like RBI or SEBI to make others dance on my tunes. Hell I’m not even a statutory organization yet!

We could ask the state Governments to use their district and taluk level staff to increase penetration of Swavalamban, but the Non-congressi state Governments are simply not interested in promoting a pension scheme of Central Government despite the fact that we have not named this scheme it after Indira/Rajiv Gandhi! Or perhaps because Swavalamban doesn’t offer much corruption opportunities to state politicians and officials, unlike in MNREGA or Indira Awas Yojana, hence they’re not interested.

Poor and lower middle class people don’t have lot of surplus income, especially in the times of inflation.